Capital is the most important resource of any business. After all, the very objective of carrying out a business is to make money. You need money at every point of time in a business. From purchasing raw materials and paying wages to purchasing land, building or machinery, you need money. You will need money to start a new business. Expansion, modernization and diversification of an established business also require money.
There are several sources of business finance. Internal sources of finance include savings, retained profit, working capital and sale of business assets. If you are planning to start a small business or already run a small business, you can use your savings to finance it. If you have retained some of the business profit instead of distributing it among partners or shareholders, then you can reinvest this amount in your business. Working capital is another source of capital. It is a short term source of capital and is used to run day to day business operations. You can raise a large amount of capital by selling a business asset which is lying useless.
External sources of finance include share capital, debentures and loans. Shares and debentures are used by large companies to raise capital. Business loans are the most common mode of raising capital. Business loans are obtained by sole proprietors, business partners and big companies. A business loan is a fixed amount of money that the lender gives to the borrower which must be repaid within a stipulated time period known as loan period. The borrower has to repay the loan amount along with an additional amount known as interest.
There are several modes of repayment of business loans. One of them is to pay a fixed amount of money every month comprising both principal as well as interest elements of the loan. In case of interest only loans, only interest is paid after regular intervals and the entire principal amount is repaid at the end of the loan period. In case of businesses having an incubation period, the borrower is not required to start repaying money in the first few years of the loan period. Loan repayment starts once the businesses start generating profit.